0
$\begingroup$

The claim was made in this link: https://www.investment-and-finance.net/derivatives/c/cds-dv01

But I don't understand why that is.

$\endgroup$

1 Answer 1

2
$\begingroup$

I don't like this page.

CDS are usually traded with a standardized running spread (usually 100 bps) and an upfront fee that varies depending on the credit. However CDS are usually quoted as an annual spread that would make upfront zero (unless the name is very distressed and quoted on upfront).

By construction, this market standard quote CDS spread comes out to be in the same ballpark as the Z-spread of the bonds. It is normal to be some basis between them.

There's no reason why the basis should be zero for the kind of par bond that your page decribes, even if the CDS and the bond have the same maturity.

The risk measures usually used for CDS include jump to default, and the sensitiviy of the CDS MTM to a 1 bp change in the CDS spread. It is comparable to the sensitivity of a bond to a 1 bp change in the Z-spread. Because of convexity, the larger the basis, the larger the difference between these spread sensitivities.

$\endgroup$
2
  • $\begingroup$ Thanks Mr. Vulis, that was very helpful. Is it the case that the sensitivity of a bond to a 1 bp change in the Z-spread can be approximated by the DV01 of the bond and so the sensitivity of the CDS MTM to a 1 bp change in the CDS spread can in turn be approximated by the DV01 of the bond? $\endgroup$
    – ILIE
    Jun 20, 2021 at 1:32
  • $\begingroup$ Yes, the change in bond price from 1bp change in its yield, or its Z-spread or OAS or ASW etc, are all very close. $\endgroup$ Jun 20, 2021 at 2:58

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.